Tax-Exempt Lobbying: Corporate Philanthropy as a Tool for Political Influence

Raymond J. Fisman is Slater Family Professor in Behavioral Economics at Boston University. This post is based on a recent paper by Professor Fisman; Marianne Bertrand, Chris P. Dialynas Distinguished Service Professor of Economics at the University of Chicago Booth School of Business; Matilde Bombardini, Associate Professor at the Vancouver School of Economics at the University of British Columbia; and Francesco Trebbi, Canada Research Chair and Professor of Economics at the Vancouver School of Economics at the University of British Columbia.

Related research from the Program on Corporate Governance includes Shining Light on Corporate Political Spending, by Lucian Bebchuk and Robert Jackson (discussed on the Forum here), Investor Protection and Interest Group Politics by Lucian Bebchuk and Zvika Neeman (discussed on the Forum here) and Corporate Governance and Corporate Political Activity: What Effect Will Citizens United Have on Shareholder Wealth? by John C. Coates (discussed on the Forum here).

Donald Trump came to office in part on his promises to “drain the swamp”—as an independently wealthy outsider candidate, he would be insulated from the influence of special interests that had corrupted Washington politics At least in this regard, Trump follows in a long tradition. For as long as there has been a U.S. government (and going much, much further back), there have been reformers labeling it as corrupt and putting themselves forward as the one to clean it up.

But anticorruption reformers quickly come up against the reality that special interests have a great many instruments of influence. Politicians may be swayed by campaign contributions from political action committees, promises of lucrative employment or consulting opportunities after they leave office (recall the allegations that Hillary Clinton was corrupted by the six figure speeches she gave on Wall Street), or favors given to friends or family.

If we are to have any hope of constraining special interests in politics, it is important to acknowledge the full set of instruments of influence they have at their disposal. In our own research, we have documented that—in an ironic twist—companies’ philanthropic efforts may serve at least in part to influence legislators, presumably to obtain laws and regulations that will serve shareholder interests, rather than the interest of the public.

We are not the first to observe that companies might strategically deploy their charitable dollars to political ends. A New York Times story in 2008, titled “Gift to Charities Keep Lawmakers Happy,” documented, for example, the lavish donations from defense companies like General Dynamics and Northrop Grumman to Pennsylvania’s Johnstown Symphony, which happened to enjoy the patronage of Joyce Murtha, wife of Representative John Murtha, who sat on the House Armed Services Committee. (The continued controversy over the Clinton Foundation’s funding suggests the same quid pro quo might operate at the country level, with foreign countries and organizations writing multi-million dollar checks to the foundation during Hillary Clinton’s tenure as Secretary of State.)

In a new working paper, we show that the anecdotes that journalists and activists have uncovered are representative of a broader pattern that is best explained by companies using their foundations to curry political favor.  We find that donations from companies’ charitable foundations follow a pattern that’s remarkably similar to the patterns in a more overt form of political influence—their political action committee spending—they tend to flow to the same congressional districts, and both increase when a district’s member of Congress sits on a committee that’s important for the company’s business interests. We can also look at more “personal” links connecting politicians to corporate foundation money: non-profits with legislators on their boards tend to get more corporate foundation money, particularly if the politician is on a committee that is relevant for the business. A rough back-of-the-envelope calculation suggests that politically motivated charity by firms is plausibly well over a billion dollars a year, swamping the scale of corporate PAC money.

Why use symphony donations rather than, say, campaign funds or lobbying efforts to influence government? First, there are limits on PAC contributions, which have been in place for nearly half a century, but none on charitable giving. Additionally, it’s relatively easy for you to look up how much Goldman Sachs’ PAC gave to New York Congressman Sean Maloney (D-NY) in the 2016 cycle since, under rules passed in the 1970s, all such donations must be publicly disclosed (he got $10,000). But following the money from the Goldman Sachs Foundation to Representative Maloney involves, as we’ll see, more detective work. Finally, while PACs have a bad name (at least on Main Street if not on K Street), corporate philanthropy allows a business to create goodwill in a community while simultaneously pleasing legislators who might oversee the awarding of government contracts or designing regulations.

To uncover potential links between corporate donations and legislative interests, we looked at the grants provided by the foundations of companies in the S&P 500 and Fortune 500 lists that comprise many of America’s largest companies. Because these grants must by disclosed on tax returns, we are able to link most donations to a specific non-profit, which can in turn be pinpointed to a particular geographic location, and finally thus associate it with a specific congressional district. (Getting information on corporate PAC giving was much easier—you can do it too on Opensecrets.org.)

We start by showing that, across congressional cycles, the grants given by a company’s foundation tend to shift to districts that also receive more PAC money, at least suggesting that some part of charitable giving may be politically motivated.

We then show that shift in both types of funds are driven by some of the same political considerations: When a politician joins a committee that’s important to the firm’s business interests (think of Northrop Grumman and John Murtha joining the Armed Services Committee, a committee that the firm spends a lot of money lobbying), both corporate foundation and PAC money into the congressional district increase. Similarly, when a member of Congress leaves office, there’s a short-term drop in both corporate charity and PAC money flowing into the district, as a seasoned (and influential) legislator is replaced by a freshman.

As an alternative measure linking politicians’ interests to individual charities, we use information on board memberships from politicians’ annual financial disclosures. We show that a non-profit is more than four times more likely to receive grants from a corporate foundation if a politician sits on its board, after taking account of the non-profit’s state as well as fine-grained measures of its size and sector. While there are various reasons that a non-profit that has a member of Congress on its board might also get more corporate money, we also provide evidence that at least some of the bump to money flows is political in nature. In analyses paralleling the findings described in the preceding paragraph, we also find that a foundation is more likely to give to a politician-connected non-profit if the politician sits on a committee that is often lobbied by the firm.

While the link between a politician’s importance to a company and PAC contributions may be somewhat stronger, the sums of money flowing through corporate charity dwarfs PAC spending: in the 2014 congressional election cycle, for example, annual PAC spending totaled $464 million, as compared to the nearly $18 billion in annual corporate giving. Our calculations indicate that, even after accounting for the non-political nature of much corporate charity, the political component still very likely swamps PAC giving.

What, then, should we do about corporate charity and politics? You might think, “Who cares? At least they’re peddling influence in a way that communities benefit.”

We would strongly disagree. Most importantly, unlike PAC contributions and lobbying, influence-by-charity is hard for the public (including both the media and voters) to observe. It takes legwork to put together even a story built on individual anecdote, whereas lobbying and PAC records can be found by opening a web browser. In our view, it also violates the spirit of U.S. law which, under the 1954 Johnson amendment to the U.S. tax code, rules that 501(c)(3) charitable organization (such as a corporate foundation) cannot “participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.”

There is good reason to have such rules in place. 501(c)(3) organizations enjoy tax exempt status, so letting them engage in politics amounts to a taxpayer subsidy of corporations expressing their political voice.

To be clear, we are certainly not opposed to companies spending profits on doing good for the world. And many of the circumstances in which companies can “do well by doing good” should be celebrated, not condemned. If companies protect the environment, help the poor, and pay living wages in order to please their customers and make their employees happier and more productive, that may be the ultimate win-win for business and also for society.

We would similarly never suggest limits on corporate philanthropy—not only would it curtail corporate giving that is non-political, but as we emphasized from the outset, companies would simply shift their money and efforts to other channels of influence. By documenting charity-as-influence we hope to highlight the need to follow the money in politics broadly speaking; and if we’re to try to regulate influence peddling, we’d do well to take account of the many channels by which corporations can buy influence.

What we would support, unambiguously, is greater disclosure of corporate-funded activities, which provides more information for voters to decide whether relations between politicians and private businesses are acceptable, and hopefully to put pressure on politicians to avoid any exchange of favors running counter to the public’s interests.

The complete paper is available here.

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